Make Or Break August 1st Event Is Coming For Bitcoin Investors – Seeking Alpha

This article aims to explain the chain of events that happened and going to happen in bitcoin space. Let me start with few basics so that for the benefit of non tech savvy long term investors. Though some of the terms mentioned below are technical, it is highly desirable for long term investors to understand to make their conviction about bitcoin more stronger.

Bitcoin transaction basics A bitcoin transaction tells the bitcoin blockchain network that the owner of the bitcoin has authorized the transfer of bitcoin to another owner. The new owner can now spend these bitcoins by creating another transaction that authorizes transfer to another owner, and so on, in a chain of ownership. So in nutshell bitcoin transactions are nothing but creating a chain of ownership as the value of bitcoin is moved from address to address.

Exponential growth of bitcoin transactions If we look at the 2 year graph on the number of transactions on bitcoin we would get a better understanding. In 2010, the number of transactions per block was below 50. In 2015, the number of transactions registered in a block was in a range of 650 to 800 transactions. Till then it has grown exponentially and in May 21, 2017, the number of transactions in a block reached an all time high of 2218.

SegWit-An Idea by Dr. Pieter Wuille Every transaction in bitcoin network contains an input address from where the value is coming, an output address to where the value is going and a digital signature to verify the authenticity of the transaction. This digital signature associated with each transaction is taking 65% of the space in a given transaction. Another problem by associating digital signature with transaction data is that the signature can be tampered to change the transaction id and later claim for refund. Dr. Pieter Wuille suggested solution to this problem by segregating the digital signature from the transactions data.

What segwit does? Segregated Witness is the process by which the space in each block is "indirectly" increased by removing signature data from Bitcoin transactions. When blocks are made smaller, this frees up the capacity to add more transactions to the chain. SegWit enabled code ignores the data attached to a signature by striping off the signature from within the input and moving it to a structure towards the end of a transaction. This would increase the 1 MB limit for block sizes to nearly 4 MB, in which 3MB data is exclusively for signature part. Once the solution is implemented every block can accommodate more than 3 times of transactions compared to existing blocks

Alternative for segwit When the segwit idea of segregating signature from transaction data floated around another theory came into picture. The idea as to increase the standard block size from 1MB to 2MB or more without segregating the witness or signature.

Segwit2Mb- The combined solution Segwit2Mb is the project that aims to resolve the above conflict between different political positions among miners and developers regarding segwit activation vs an increase of the on-chain blockchain space through a standard block size increase. Segwit2Mb combines segwit as it is today in Bitcoin version 0.14 with a 2MB block size hard-fork activated ONLY if segwit activates (95% of miners has to agree with the proposal). The hard-fork will happen at a future date once the segwit is activated.

NewYork Agreement In May 2017, developers and miners together joined and reached an agreement at Bitcoin Scaling Agreement at Consensus 2017, there after called as NewYork Agreement. As an outcome, they unanimously agreed to immediately support below two parallel upgrades to the bitcoin protocol, which will be deployed simultaneously and based on the original Segwit2Mb proposal:

Activate Segregated Witness at an 80% threshold, signalling at bit 4 Activate a 2 MB hard fork within six months

As mentioned above, the consensus percentage required for Segwit was reduced from 95% to 80% in the New York agreement. This mandatory activation of segwit deployment comes under Bitcoin Improvement Proposal 148 (BIP 148)

What can happen to Bitcoin during this process When segwit happens, it does nothing to Bitcoin as a coin. It will remain as it is because it is bacically a user activated soft fork or UASF, without any split. When standard block size increase, the coin will split into two, one running with existing 1MB block size and the new one forked out with 2MB block size. This is planned to happen after 6 months of segwit activation.

Sounds great right? But the trick lies in the first part. To understand this, we should understand what happens during segwit activation. miners have to signal that they are ready of segwit. If the total hash rate of miners who agree to segwit reaches majority, then the nodes following the original chain will reorganize and begin to follow the segwit activated UASF chain.

The newly segwit activated BIP148 nodes will begin to orphan Bitcoin blocks not signaling Bit 1 (1 means agreeing with segwit) at its UASF forking point. In such an event, there is a chance that a significant number of financial transaction records will disappear from nodes that rejected segwit activation. Mining community calls this as "wipe out"

A contingency plan against UASF (BIP148)- A hard fork by prominent mining community Bitmain as front runner, majority of the mining community have the opinion as the UASF chain presents a risk of the original chain (the chain which rejects segwit) being wiped out. If there is no contingency plan, all transactions that occurs on the original chain after the UASF forking point will face the risk of being wiped out. According to them this has disastrous consequences for the entire Bitcoin ecosystem. They maintain the stand that UASF is an attack against users and enterprises who disagree with activating SegWit right now without a block size increase.

UASF is an attack against users and enterprises who disagree with activating SegWit right now without a block size increase, which is a very important clause in the Hong Kong agreement made by the global Bitcoin community in February, 2016.-bitmain

To protect their interest, they plan for a User Activated Hard Fork, or UAHF. They will do the hard fork at 12 hours and 20 mins later than UASF to maintain the original segwit not active chain. This hard forked block will accept block of which the size is less than 8MB and miners will soft-limit the block size to less than 2MB.There will be a soft fork rule added into the protocol to limit the sigops (signature part) per transaction within 20K.

BTC 148 & BTC Legacy If this two events happens, here would be two types of Bitcoin tokens, "BTC 148" for coins on the soft forked chain, and "BTC Legacy" for coins on the chain that did not activate segwit. As an investor we don't need to worry as each bitcoin would effectively be copied to both chains. If you hold bitcoin right now, you will hold both "148 BTC" and "Legacy BTC" after the split.

"In the event of a hard fork of the Bitcoin protocol, it is likely that Coinbase will temporarily suspend the deposit and withdrawal of bitcoin from the platform pending our assessment of the technical risks posed by any fork, such as the possibility of replay attacks, network instability, or other factors. Customers should take note that they will not be able to withdraw bitcoin from or deposit bitcoin to Coinbase for a period of up to 24 hours or more following the fork. In the event of a hard fork of the Bitcoin protocol, Coinbase may suspend the ability to buy or sell on our platform during this time."

- Coinbase

Advise for long term investors 2 year wait for such an event is going to end by August 1st. Better keep calm and don't trade from July 31st till August 3rd.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Make Or Break August 1st Event Is Coming For Bitcoin Investors - Seeking Alpha